New South Wales Supreme Court CITATION : Integral Energy Australia v Kinsley & Associates Pty Limited [2009] NSWSC 64 HEARING DATE(S) : 18 February 2009 JUDGMENT OF : Hammerschlag J EX TEMPORE JUDGMENT DATE : 18 February 2009 DECISION : Summons dismissed. Plaintiff to pay the costs of the first defendant. Monies currently standing in Court pursuant to Consent Orders dated 7 November 2008, be released to the first defendant together with any interest CATCHWORDS : BUILDING & CONSTRUCTION - Building & Construction Industry Security of Payment Act 1999 (NSW) challenge to validity of adjudication determination on the basis that adjudicator failed to include the reasons for his determination under s 22(3)(b) of the Act - held that reasons given were sufficient LEGISLATION CITED : Building and Construction Industry Security of Payment Act 1999 (NSW) Waterways Authority v Fitzgibbon (2005) 79 ALJR 1816 CASES CITED : Plaza West Pty Limited v Simon's Earthworks [2008] NSWCA 279 Tolfab v Tie [2005] NSWSC 236 Brodyn v Davenport (2004) 61 NSWLR 421 Integral Energy Australia ABN 59 253 130 878 PARTIES : Kinsley & Associates Pty Limited ACN 21 082 609 783 Marcel Weyland FILE NUMBER(S) : SC 55101/2008 COUNSEL : M Christie with B Ilkovski (Plaintiff) S Goldstein (First Defendant) SOLICITORS : Middletons (Plaintiff) Colin Biggers & Paisley (First Defendant) - 13 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY & CONSTRUCTION LIST HAMMERSCHLAG J 18 FEBRUARY 2008 55101/2008 INTEGRAL ENERGY AUSTRALIA -V- KINSLEY & ASSOCIATES PTY LIMITED & 1 OR EX TEMPORE JUDGMENT BACKGROUND 1 HIS HONOUR: By summons issued on 7 November 2008 supported by a Technology and Construction List Statement, the plaintiff (or Integral Energy) moves for a declaration that an adjudication determination made by the second defendant on 29 October 2008 in favour of the first defendant for $140,249.55 (including GST) ("the determination") pursuant to the provisions of the Building and Construction Industry Security of Payment Act 1999 (NSW) ("the Act") is void for the reason that the adjudicator failed to include in it the reasons for his determination which he must do under s 22(3)(b) of the Act. 2 Section 22(3) of the Act is in the following terms: "The adjudicator's determination must: (a) be in writing, and (b) include the reasons for the determination (unless the claimant and the respondent have both requested the adjudicator not to include those reasons in the determination). 3 Mr Christie of counsel together with Mr Ilkovski, appeared for the plaintiff. Mr S Goldstein of counsel appeared for the first defendant. The second defendant indicated that he did not wish to participate in the proceedings, and would abide the judgment of the Court. 4 The plaintiff engaged the first defendant (as Contractor) under a written building contract to construct certain works (defined as "Services") at a site known as the Hoxton Park Technical Training Centre in return for which it would be paid "Service Fees". 5 Clause 3 of the contract deals with variations claimed by the contractor. It provides that the contractor must not vary the "Services" except as directed by Integral Energy and otherwise as provided in clause 3. It provides a procedure for the claiming of payment for variations and the rate or price of each variation. It is in the following terms: "3.1 Authorised Variations The Contractor must not vary the Services except as directed by Integral Energy and as otherwise provided in this clause 3. 3.3 Revision of Service Fees and Timetable (a) … (b) the rate or price of each variation must be determined by agreement between the parties, or in the absence of such agreement then a fair reasonable valuation of the variation will be made by Integral Energy and the Service Fees will be adjusted accordingly. (c) … (d) The Contractor is not entitled to any payment (pursuant to this Agreement or otherwise at common law or equity) in relation to any variation except as provided in clause 3.3(B)." 6 On 19 September 2008 the first defendant as claimant under the Act made a claim for the unpaid balance of a number of variations which were numbered 2 to 10 (inclusive), 12 and 21, totalling $127,499.59 plus GST of $12,749.96. 7 The claim was in the form of a tax invoice number 13355 together with a schedule describing each variation, its date, the amount claimed, the amount allowed by the plaintiff (described as Integral current claim value), and the balance. 8 The plaintiff had earlier allowed parts of variations 2, 3, 4, 6, 7, 8, 9 and 21. It disputed the balance of those variations claimed and the entirety of the other numbered variations earlier referred to. 9 On 30 September 2008 the plaintiff as respondent under the Act responded by delivering a payment schedule (as contemplated by s 14 of the Act) reflecting that it proposed to pay the first defendant nil. The payment schedule gave as its reasons the following: "[Note: Detail all reasons for non payment of any amount shown in the Payment Claim. In an adjudication, the respondent cannot raise in defence any reason not stated here.] Please refer to Integral Energy letter dated 29 September 2008 and Integral Energy Statement of Account dated 29 September 2008 Please refer to all correspondence from Integral Energy relating to Kinsley & Associates Variation Requests 2-31 inclusive." 10 It is agreed that the dates 29 September 2008 should have been 30 September 2008. The adjudicator approached it on that basis. 11 The letter dated 30 September 2008 was in the following terms: "We write with regards to your Tax Invoice 13355 dated 19 September 2008, which was received on the same day and respond as follows. We note that your claim is made under the Building & Construction Industry Security of Payment Act (NSW) 1999 (The Act). We advise that the 10 Business Days for our response as required under The Act expires on 03 October 2008. We have undertaken our own review of your account and attach our Statement of Account which provides the supporting information for the Payment Schedule as required by The Act. We enclose the following:- · Completed Payment Schedule from NSW Government Information Kit for the Act. · Statement of Account as prepared by us. We advise that monies due under the Contract are only those as approved by Integral Energy. We refer you to clause 3 of the Contract. Unapproved variations are not monies due under the Contract and as such can not be included within a payment claim. We advise that you have claimed for unapproved variations in an attempted (sic) to gain payment for monies that are not due under the Contract. Integral Energy states that all claims must be in strict accordance with Clause 3 of the Contract. Your claim is not in accordance with the Contract. We state that Our Payment Schedule, as required under The Act, is attached and is for the sum of Nil dollars. This correspondence shall be faxed and posted to you today (30 September 2008)." 12 The accompanying Statement of Account was in columnar form. It referred to each variation claim by number, description and value. Thereafter it had separate columns entitled Approved/Rejected, Approved Value and Comment. 13 Where claims were partially approved the word "Approved" appeared in the relevant column adjacent to the amount that the plaintiff accepted. Where the variation was not accepted at all, the word "Rejected" appeared in the adjacent column. 14 Against each of the variations in the comment column, appeared the notation "Closed". 15 The first defendant made an adjudication application on 15 October 2008 and the plaintiff responded by an adjudication response dated 24 October 2008. 16 In its adjudication response the plaintiff's primary position was that the defendant was not entitled to any further payment for any of the claimed variations, because the first defendant had not complied with the procedural requirements of the contract with respect to variations. 17 Variation 4, which was described as being for "Building Complexity and Size" was the largest of the claims. It was originally for $64,352. However, $10,080 had been allowed, leaving the claim as one for $54,272. 18 In response to Variation 4 the adjudication response (which can be used as an example of the response to other variations) submitted: "Whilst Kingsley was not entitled to any variation claim under this head, in the alternative, if the adjudicator is prepared to allow the variation, then Integral has valued the variation in accordance with 3.3 (b) (CSA) on the basis of a fair and reasonable valuation of the claim in the sum of $10,800 for the reasons scheduled in Integral's letter dated 8 April 2008 at page 5. The valuation claim was calculated on the basis of: ^ 7 additional engineering days, and ^ 7 additional drafting days in respect of: ^ the reception desk; ^ 2 training rooms; ^ first aid room This sum has been paid so Kinsley has no further claim." 19 In relation to Variation 5 (which can also be used as an example) and which was for "Additional Structural Complexity" in an amount of $11,700, the schedule reflected it as rejected in whole. 20 In answer to it the following submission was made in the adjudication response: "Integral submits that Kinsley is not entitled to claim any amount for the works specified in its letter dated 25 June 2007 as: · For the reasons set out in paragraphs 2-8 of Part A of the Response above, Kinsley's adjudication application was made out of time; and · For the reasons set out in paragraphs 9-14 of Part A of the Response above: ^ the variations claimed are for works undertaken by Kinsley which were finalised in April 2007 prior to the date of the claim made on 25 June 2007. ^ the payment claims relate to works which were finalised in April 2007, over 12 months ago. ^ Kinsley is therefore not entitled to bring the claim pursuant to section 13(4) of the Act;" 21 Additionally, in the adjudication response, a submission was made that the works were within scope and not a variation at all. OTHER PERTINENT PROVISIONS OF THE ACT 22 Section 20 (2B) of the Act is in the following terms: The respondent cannot include in the adjudication response any reasons for withholding payment unless those reasons have already been included in the payment schedule provided to the claimant. 23 Section 22 (2) of the Act is in the following terms: In determining an adjudication application, the adjudicator is to consider the following matters only : (a) the provisions of this Act, (b) the provisions of the construction contract from which the application arose, (c) the payment claim to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the claimant in support of the claim, (d) the payment schedule (if any) to which the application relates, together with all submissions (including relevant documentation) that have been duly made by the respondent in support of the schedule , (e) the results of any inspection carried out by the adjudicator of any matter to which the claim relates. (emphasis added) CONSIDERATION 24 The adjudicator gave consideration to the plaintiff's submission disputing the contractual validity of the claim as a whole on the grounds submitted in the 30 September 2008 letter. His conclusion was that a failure to comply with those requirements did not preclude the first defendant's claim. That part of the determination is not the subject of any complaint by the plaintiff. 25 In relation to the submission that the works were within scope and not a variation, the adjudicator determined, in my view correctly, that this had not been raised in the payment schedule and that he was accordingly not entitled to consider it because of the provisions of s 22(2)(d) of the Act. 26 In his determination the adjudicator had reference to the 30 September 2008 letter and statement of account referred to in the plaintiff's payment schedule. He correctly considered that the further reference to all correspondence did not state any reasons for non-payment and determined that he was not entitled to consider any issues raised in that unspecified correspondence. 27 He also determined, correctly, that had the plaintiff's nil amount been supported only by the reasons contained in the Statement of Account there would not have been compliance with s 14(3) of the Act which requires a respondent to indicate its reasons for withholding payment. 28 The adjudicator dealt with each of the variations. One of those variations (number 2) was for "Additional Design Work" allegedly done which had to be undertaken in relation to flood level impacts. It may be used as an example of how the adjudicator proceeded to deal with each of the variation claims in that in substance he followed the same approach as with the others. He dealt with it as follows: " 6.0 V2 – FLOOD LEVEL IMPACTS 6.01 The variation: The claim relates to additional design work which had to be undertaken as a result of Liverpool Council insistence that its levels be adopted in lieu of SMEC Australia levels included in the tender documents. [I accept Kinsey's statement that the work has been performed.] 6.02 The claim: Kinsley claims $11,795. The comment in the Schedule is 'approved'. The Schedule states that $4,025 has been paid, and this has been confirmed by Kinsley. 6.03 Integral's submission re scope: [Pursuant to par.4.04 I am not entitled to consider this reason.] 6.04 Integral's submission re Kinsley's failure to adhere to Contractual Requirements necessary for variation claim: This issue has been considered in pars. 4.07 to 4.10 incl. 6.05 Annexure 'C': As per par.4.04 I am not entitled to read and consider the letter which is Annexure 'C'. 6.06 Integral's valuation of the variation: Integral's contractual right to its valuation being conclusive has been considered at par.4.10. 6.07 Determination: After considering the submissions I determine that Integral pay Kinsley $7,770, i.e. the difference between $11,795 and $4,025." 29 The plaintiff put that there was a substantial failure by the adjudicator to provide reasons for his determination; or, if he provided reasons, the reasoning was not discernible because one cannot fathom from the determination why the adjudicator adopted the figures for each of the variation claims which he did. He adopted, ultimately, the figures as claimed by the first defendant. 30 It was put that the adjudicator failed to record everything necessary to enable an understanding of why he reached the decision he did. Reliance was placed on what was said by Hayne J in Waterways Authority v Fitzgibbon (2005) 79 ALJR 1816 at 1835 [129]-[132] to the following effect: " Reference was made in argument to the "sufficiency" of the primary judge's reasons. When it is said that a judge did not give "sufficient" reasons for a decision there may be some doubt about what principles are engaged. Reference may be being made to the duty of a judicial officer "to make, or cause to be made, a note of everything necessary to enable the case to be laid properly and sufficiently before the appellate Court if there should be an appeal [including] not only the evidence, and the decision arrived at, but also the reasons for arriving at the decision". To fail to make or cause to be made such a note may invoke principles of procedural fairness and constitute a failure to exercise the relevant jurisdiction. In the present case, however, reference to the "sufficiency" of the primary judge's reasons is not to be understood as seeking to invoke only those principles. Rather, because the primary judge was bound to state the reasons for arriving at the decision reached, the reasons actually stated are to be understood as recording the steps that were in fact taken in arriving at that result. Understanding the reasons given at first instance in that way, the error identified in this case is revealed as an error in the process of fact finding. In particular, it is revealed as a failure to examine all of the material relevant to the particular issue. " 31 It was put that: a having disposed of the plaintiff's contentions with respect to the operation of the contract, in order for the adjudicator then to have reached any conclusion as to the amount of any of the variations to which the defendant is entitled, he needed to engage in a process of valuing them; b s 22(3)(b) of the Act required him to include in his determination the conclusion that that exercise yielded and the reasoning which led to that conclusion. 32 It is manifest (and Mr Goldstein accepted so much) that the adjudicator did not engage in any process of valuation, that is, a process of assessing the reasonable value of the work the subject of the variations. 33 The real question is, however, it seems to me, whether, having regard to the way the plaintiff articulated all its duly made submissions in support of the payment schedule, the adjudicator was obliged to engage in the process which the plaintiff argues he had to, and then to provide reasons disclosing his conclusion and the basis for it. 34 It was no part of the reasons for withholding payment articulated by the plaintiff in its payment schedule either that the work asserted had not been done or the amount claimed did not represent a fair and reasonable valuation of the various variations. 35 Mr Christie drew attention to the third paragraph which says: "We have undertaken our own review of your account and attach our Statement of Account which provides the supporting information for the Payment Schedule as required by The Act." 36 He put that this raised the issue of valuation. 37 In my view it did not. 38 The position taken by the plaintiff was clearly restricted to the assertion that unapproved variations were not permitted. The plaintiff was not by that statement putting that the variation work allegedly done was not being paid because it had a lesser (or no) value. 39 The plaintiff's sole angle of attack was that there had been no agreement or approval as required by cl 3.3 of the building contract, and that the remaining claims for variations were for that reason, and that reason alone, precluded. 40 It follows, because of s 20(2B) of the Act, that the plaintiff (as respondent) could not legitimately include in its adjudication response as a reason for withholding payment that the amount of the variations did not represent a fair and reasonable valuation of the claims. 41 The reference in 6.07 of the determination to "the submissions" was a reference to the submissions which had been duly made. 42 Under s 22(2)(d) of the Act the adjudicator was only to consider the payment schedule together with all submissions that had been duly made. No submission to the effect that the plaintiff contended for a different valuation of the work had been duly made. 43 The plaintiff properly did not put its case on the basis that there had been a failure on the adjudicator's part to afford procedural fairness because he had not dealt with submissions duly made. 44 In the present case the adjudicator attended to all the submissions duly made by both parties. The plaintiff, having not challenged the value of the work, and having not made any submission in that regard, the adjudicator was not, in my view, obliged to engage in a valuation process. The issue was not raised before him: (see for example Plaza West Pty Limited v Simon's Earthworks [2008] NSWCA 279 at [34]). 45 It follows that there was no failure by the adjudicator to include the reasons for his determination as required by s 22(3)(2) of the Act and the plaintiff's challenge accordingly fails. 46 In the alternative, Mr Goldstein put a submission, relying on the decision of Macready AsJ in Tolfab v Tie [2005] NSWSC 236 at [43] that the requirement to give reasons was held by Hodgson JA in Brodyn v Davenport (2004) 61 NSWLR 421 at 441 [53] not to be a basic and essential requirement for the validity of an adjudicator's determination. 47 I have significant doubt that that is the effect of what Hodgson JA held in Brodyn v Davenport. His Honour held that a basic and essential requirement was the issue of a determination in writing as contemplated by s 22(3)(a) of the Act. Section 22(3)(b) of the Act provides that a written determination must state the reasons. 48 I have significant doubt that a fair reading of the judgment of Hodgson J, discloses any intention on His Honour's part to say that there could be a valid determination without reasons, but it is not necessary finally to decide that issue, because I have come to the conclusion that the adjudicator provided sufficient reasons in any event. 49 The summons is dismissed. 50 The plaintiff is to pay the costs of the first defendant. 51 The monies currently standing in Court, pursuant to Consent Orders dated 7 November 2008, may forthwith be released to the first defendant, together with any interest. 52 Exhibits are to be returned. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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